When analysts say synthetic-diamond prices are falling and likely to keep doing so, it’s almost a given that producers of the stones will shout the opposite.
Several such companies are betting on the truth of their own narrative: that prices will remain strong, or even increase. Yet with the rate of production going steadily up, that looks like quite a gamble. Lab-grown polished output is rising 15% to 20% per year due to a drop in production costs, according to a December 2018 report by consultancy firm Bain & Company. Under the usual rules of supply and demand, that means prices should be declining unless demand increases at a faster pace — and indeed, wholesale prices for 1-carat, G-color, VS-clarity lab-grown polished goods have slumped about 70% over the past two years, the report says.
“Individual lab-grown-diamond producers could see significant growth in demand for their products due to an attractive marketing campaign or an attractive product, but overall, we see prices of lab-grown diamonds have decreased at retail and wholesale,” says Olya Linde, a partner at Bain & Company and one of the report’s authors.
“The simple reason for that is, as technology is improving and the cost of production is decreasing, the barriers to entry are not as big,” she continues. “We saw this with industrial synthetic diamonds 50 years ago. When they started production, costs were high, but they came down significantly as the technology improved and the efficiencies kicked in.”
Analysts’ view: A steady slide
Bain’s findings dovetail with those of diamond analyst Paul Zimnisky, who observed a decline in lab-grown prices last year due to improvements in production capabilities. The price of a generic 1-carat lab-grown diamond fell to a discount of 42% relative to natural stones in late November 2018, when Zimnisky published his report, compared with 29% in January of that year.
“Lab-grown diamonds are a product of technology, and as we’ve seen with synthetic sapphires, rubies and emeralds, as the technology advances, products become more affordable,” De Beers CEO Bruce Cleaver said when the company launched its Lightbox fashion jewelry line last May.
Notably, it priced Lightbox pieces at a fixed $800 per carat, undercutting many other producers’ lab-grown goods. In offering this rate irrespective of size and quality, De Beers also rejected the standard practice of selling synthetics at a certain discount to natural diamonds. Dynamic pricing exists for natural stones because different categories have different levels of availability, which is less of an issue for synthetics, as laboratories can pump them out as per the operator’s wishes.
Growers’ view: Plentiful demand
Yet synthetics-only producers say supply is harder to come by than one would think — and that demand is on the rise.
California-based Chatham Created Gems & Diamonds — which grows at least 100,000 carats of rough diamonds annually — has enjoyed buoyant demand in the past five years, according to Tom Chatham, its outspoken CEO. He also reports a dearth of supply.
“Contrary to some industry pundits, increased production, in view of the huge potential market, is not going to affect prices for [1-carat-plus] stones,” he maintains. “There are only a handful of companies in the world that can grow large white rough. It is not, as some would lead you to believe, just a matter of leaving the production equipment running longer.”
In fact, a production shortage and expectations of burgeoning consumer demand prompted Diamond Foundry, one of the largest lab-grown producers, to raise wholesale prices 15% on January 1.
“We see demand increasingly outpacing supply,” the California-based firm said in a note on its website in December. Boosting its stone output is more difficult than mining, the company argued, as the diamond-growing technology involves significant expense and expertise.
And while the company admits there was some fluctuation in prices last year, its outlook is still positive. “Prices fell in August, but there is presently a massive shortage in the supply of lab-grown diamonds, which is causing a price increase,” CEO Martin Roscheisen tells Rapaport Magazine. “We believe this shortage will persist for several years.”
In a testament to that optimism, Diamond Foundry began production at a new facility in Wenatchee, Washington, in November. The plant will increase the company’s output to 1 million rough carats per year by the end of 2019, compared with the 100,000 carats it currently grows.
Aiming too high?
Unlike De Beers, Diamond Foundry prices its lab-grown diamonds as luxury products. Its higher-end stones, which it calls “certified uniques,” carry a recommended retail price of 55% off the Rapaport Price List.
That may be cheaper than the equivalent natural diamonds at major online retailers, but it still means a 1-carat engagement ring from the company costs more than $2,000 for a round stone, and upward of $3,000 for a fancy shape, excluding the setting. Several items on the Diamond Foundry site are priced at more than $15,000.
For a relatively nascent company, the higher end is a challenging market to be in, given how much luxury prices rely on long-term branding clout. While major jewelry houses can afford the weighty costs associated with marketing non-essential products, Zimnisky notes that the expense can be a barrier for new entrants.
“If the ‘higher-price-point lab-grown-diamond’ companies do, in fact, prove overwhelmingly successful this year, I would be quite surprised,” he comments. “While some of these companies have been successful with social and traditional media, there is no significant lab-grown-diamond marketing campaign that I am aware of...outside of Lightbox.”
There’s significant consumer demand for 1-carat synthetic diamonds below $1,000, but not for those costing $4,000 or $5,000, Zimnisky adds.
“I’m sure there will be some specialty companies and retailers that can be successful selling at the higher price point, but I think they will be few and far between,” he says.
Driving a hard bargain
So is affordable fashion jewelry where the synthetics market is heading? For the most part, the answer seems to be yes.
But whether De Beers’ $800 per carat will become the going price for all synthetics is another question.
The vast majority of Lightbox’s stones are much smaller than 1 carat, and when you’re talking about an earring with a 0.17-carat center stone surrounded by pavé, $800 per carat is suddenly not so cheap. It may even be more expensive than some small natural stones are.
In that vein, a recent Diamond Foundry web post called De Beers’ attempt to paint synthetics as a low-cost product “brilliantly misleading” and “fake news.”
Chatham, too, is unimpressed. De Beers’ move “was disruptive initially, but when it turned out that Lightbox would not sell 1-carat stones but only total-weight melee, the disruption dissipated,” he says. Chatham’s claims aren’t quite accurate: Lightbox sells 0.50-carat and larger stones, though the only full 1-carat stone on its site, a princess cut in a pendant, was sold out at press time. The retailer has “plenty of satisfied customers” who have bought the piece, and plans to restock it soon, according to Lightbox chief marketing officer Sally Morrison.
Diamond Foundry, meanwhile, suggests retail prices of $250, $750, or $1,000 per carat, depending on size, for its own range of Lightbox-style synthetic stones between 0.25 and 0.85 carats — a category it calls “program diamonds.”
A clash of data
Whatever the price is now, the recent analytical reports indicate the products will lose value. A likely result is that natural and synthetic diamonds will become two distinct markets, says Bain’s Linde — a scenario that closely matches how De Beers has presented the two categories.
“If the prices of lab-grown diamonds continue to go down at the rate they’re going down, the markets will separate themselves,” she predicts. “There’s a high potential for them to do that.”
Asked why Diamond Foundry’s expectations differ so drastically from the consensus, CEO Roscheisen argues that industry surveys like Bain’s are based on the previous year’s data.
“The lab-grown industry continues to change and evolve quite quickly,” he says, adding that “we are able to see our actual demand data,” not just economic forecasts.
For the time being, at least, it seems the two sides in this debate will continue to see the world from opposite vantage points.
Image: Machines at Diamond Foundry's facility in San Francisco, California.Article from the Rapaport Magazine - February 2019. To subscribe click here.